What a Cheerleading Monopoly Says About the American Economy

Hi,

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A week ago I would not have predicted that I would be studying cheerleading. I study monopolies, big tech, and politics. But after writing that story a few days ago and seeing the reaction, I think the story on cheerleading is important, because it says something about our larger political economy.

Every corporate monopoly, in every sector and across history, uses similar power arrangements: coercive contracts, secret rebates, retaliation, buying up competitors, political corruption, etc. All of these are present in the Varsity brands story. Since publishing the story, I have heard from cheer coaches, international cheer officials, parents, and one Harvard Law professor of antitrust.

Here are a few observations.

• I missed out on two anti-competitive practices in the industry. The first is called “Stay to Play.” For many cheerleading competitions, though not all, out-of-town contestants are required to stay at a specific area hotel or set of hotels, or they cannot enter the contest. This is yet another way to raise prices on cheerleaders, and parents hate it. The second is that Varsity tends to be very aggressive about takedown notices for cheer contest video. If you film your kid at an event and put it up on Facebook or YouTube, Varsity is likely to ask you to take it down because it’s competitive with their VarsityTV streaming app. As one parent told me, it’s basically Varsity preventing you from sharing your memories publicly with your family or friends.

• Cheerleading is more dangerous to monopolize because it involves children. There’s a whole tangled legal fight between the NCAA, the Department of Education Office of Civil Rights, and Varsity over the definition of sport. This is one area where policymakers at the Education Department, and not just at the antitrust agencies, have some authority. The bottom line is children are doing dangerous gymnastics and tumbling on surfaces like grass and rubber tracks that have not been proven safe, and one result is more catastrophic injuries than might otherwise happen. (I also heard rumblings about other safety concerns that go beyond physical injuries endured during contests.)
  
  There is an alternative to the existing Varsity model of cheerleading. Roughly ten years ago, some college coaches basically took competitive cheerleading and turned it into a safer and regulated sport. After a series of bitter fights over branding, they eventually had to name it Acrobatics and Tumbling instead of Competitive Cheer. Now there’s a battle about cheer internationally, with questions about whether and how it can become an Olympic. To give you a sense of the stylistic differences, here’s a picture of Acrobatics and Tumbling.

• While the story I wrote was about cheerleading, it has broader implications for how we understand our political economy. For about thirty years, corporations in America have been getting bigger, and it’s harder and harder to start and run a small business. Some scholars, like Edward Lazear of Stanford University, Michael Strain of the American Enterprise Institute, and John Van Reenen of M.I.T. believe that this rise in concentration is happening for natural technical reasons. Their argument is that bigger corporations are just better at what they do because they have ‘economics of scale,’ aka it’s more efficient to produce more steel or more search queries if you’re making a lot of them. This argument comes from an intellectual movement started at the University of Chicago known as ‘the Chicago School.’

  Other scholars, like Columbia University’s Tim Wu, economist Luigi Zingales, and Northeastern University’s John Kwoka are making a more traditional American anti-monopoly argument that this increase in scale is a function of legal changes that make it easier to charge higher prices and exclude competitors. This would include pointing at practices like mergers, rebates, the ability to exclude competitors, and other things that, as it turns out, Varsity seems to be doing.
  
  This debate is more than academic. Right now, there’s a bipartisan investigation by the House Antitrust Subcommittee into large technology corporations, and it’s led by Democrat David Cicilline and Republican Doug Collins. They are wrestling with whether concentration is a function of power, not efficiency. How we resolve this debate is likely to have significant impacts on how we organize our markets and our corporations going forward.
  
  What’s useful about the story of cheerleading is that it seems to resolve this debate in favor of the anti-monopolists. There are no obvious economies of scale involved in cheerleading. As Harvard Law professor Einer Elhauge put it, “If something as naturally decentralized as cheerleading can be monopolized so easily, it really demolishes so many Chicago School premises.” Cheerleading just doesn’t follow the standard example of a tech business. It’s not like making steel or building a search engine, training two cheerleading teams takes twice as much time as training one. Yet cheerleading seems to be as or even more monopolized as, say, social networking, syringe manufacturing or airlines, all of which are highly concentrated industries.

  In other words, the example of Varsity suggests industries are probably more concentrated today because of political arrangements, not technological advances.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

P.S. So this next part is technical and in the weeds about economics and financial policy, so if that’s not your cup of tea, well… you have been warned.

Last week, I wrote about the point of economics. One of my arguments was that the discipline has an implicit bias towards those who have control of data, because economists like to measure things. That means economists are going to be controlled, at least partially, by corporations that have large stores of data to share with them. I also pointed out that the way we organize regulations and force what’s called ‘cost/benefit’ analysis on every rule implicitly gives power to economists who use opaque models.

I got an email response from someone who used to work for the Commodities Futures Trading Commission, which regulates derivatives trading. His point of view is worth sharing.

CFTC has an abundance of amazing data. Due to various bad excuses, CFTC doesn't do much with it. A past Chief Economist, Andrei Kirilenko, started to use our data to get published, personally. He brought in interns and contractors to help him sift through what he needed. He ended up getting published and leveraged that to become a professor at MIT. I'm fairly certain he got the job just so they could have access to his data set. Incidentally, he didn't exercise good custody of the data, and there was a breach where some interns and/or contractors left with the same set. Whoops!

Cost-benefit analyses:

I always saw this as a second executive veto on Congress, and I still don't understand why it's constitutional. If Congress says implement a thing or behave in a way, and then a federal agency says it's going to impose too great a cost on industry, what authority does Congress have?

The CFTC's rulemakings started out in 2010 writing extensive cost-benefit analyses with economist projections of costs, savings, etc. The Office of General Counsel then ordered the rule teams to scrap it all and use a boiler-plate "we considered the costs" paragraph. That was successfully challenged in court, and those rulemakings had to be re-proposed with new CBAs. I found all of that a waste of time, and said so. In soliciting comments, industry would provide their own cost estimates (without any justification), and we were ordered by OGC to assume the costs at face value. I fought to include a benefit as avoiding a multi-trillion dollar financial collapse, as we had just experienced, which obviously was not adopted.

Quantitative modeling:

This is the group I worked most closely with. We evaluated the risk models various clearing houses used to price and project risk, in order to calculate how much collateral to collect on trades (or "margin," to your point of elites using obfuscation to hide their actions). The Dodd-Frank Act sought to incentivize clearing, or mutualizing, trades under a regulated system by making collateral for uncleared trades more expensive. Industry proposed a standardized model for uncleared products. For stupid office politics reasons, our group was barred from writing a report on this model. To no one's surprise, the industry model consistently under-estimated and over-discounted all sorts of factors in order to make uncleared products cheaper than cleared products in contravention of Dodd-Frank's stated goals.

As far as [Federal Reserve Chairman] Jay Powell goes, Chairman Massad considered him a friend and did everything he could to bend our actions to Powell's will. I will say that in the fight to pass Dodd-Frank, the Fed wanted oversight of derivatives and didn't get it. They did get the power to let us know their opinion, and the senior management there tried relentlessly to use that to coerce us. There are a number of good stories related to this, in how the Fed is beholden to small cartel of banks hell-bent on protecting their oligopoly status and keeping their moats intact.